Invest Bulk Sum: Taxable account now, or tax-free more slowly

[sizz]

Posting on this topic because I feel it is a more general (perhaps beginner level) question about the value of getting money into the market quicker vs. the value of getting money into tax advantaged accounts.

Assuming an emergency fund has already been established and IRA contributions are maxed out, you have $6000 you would like to invest. The 401k (Roth) has NOT been maxed out yet, but can only be added to through payroll contributions (a max of ~850 every 2 weeks). Also a taxable account is available to put the $6000 in all at once.

So what is the best option?
1.) add ~850 every 2 weeks to the Roth 401K (total 6K complete in ~3 months)
2.) add 6000 now to the taxable account

it is number 2, correct? any advantage in growth that #2 has by deploying the $6K ~3 months early is outweighed by the fact that the earnings on the $6K over several years is taxable?

[Admiral]

The answer is "it depends." Putting aside any savings on taxes:

Do you need access to the money, or don't you? If you might, then put it in taxable. Or put half in taxable.

If you already have sufficient reserves, and the Roth 401k has good, low cost investment options, then that is a better choice, based on tax free growth over time.

[NiceUnparticularMan]

If I understand your question and reasoning correctly, I agree. The small expected benefit of a few more months of time in market is likely going to be outweighed by the long-term benefit of maximizing your tax-advantaged accounts.

Of course there is always some chance you might miss the best few months you will ever see in your lifetime. But if that really concerned you, you could do both--stick it all invested in your preferred mix in a taxable account for now, and gradually shift it over as allowed. If you are using large liquid ETFs and such, this shouldn't be all that costly.

[PFInterest]

Are you sure a Roth 401k is a better choice?
I also vote retirement vehicles first prior to taxable.

[grabiner]

Another alternative is to put the money in an investment the taxable account, and then sell the taxable investment over time to invest in the tax-deferred account.

This is a common strategy for investing a windfall. If you have been contributing $3K to your 401(k), and then inherit $90K, you can only increase your 401(k) contribution to $18K per year. It will take you six years to get the $90K into the 401(k) this way, but you can invest the whole $90K once you are ready to invest it, and sell the taxable account to allow you to continue to max out the 401(k) for six years (or longer if the taxable account grows). You will get the benefit of the gains of the stock and bond markets over the whole time, and get the tax deferral as quickly as possible.

[livesoft]

^Yes, do both.